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Question:
1212Using the constant growth dividend model, the price for a common stock is:
Solving for k :
where:
P = current stock price
D = year end expected dividend
k = cost of common equity capital
g = sustainable (constant) growth of equity, earnings, and dividends
The sustainable growth for a company's dividends equal the ROE times the earnings retention rate. The earnings retention rate equals 1 minus the dividend payout rate. Therefore:
g = 0.15 × (1 − 0.20) = 0.12
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